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Background

The Chief Commissioner grouped the Taxpayer with Rose Bay Veterinary Hospital Pty Ltd (‘Rose Bay’) and ANHM Investment Pty Ltd as trustee for the Eastside Property Unit Trust (‘the ANHM Trust’), under s. 72 of the Payroll Tax Act (“the Act”) for the period from 19 December 2011 to 31 August 2014 (‘Relevant Period’). The grouping was due to the majority controlling and beneficial interests held by Dr Howard Smyth and Dr Michael Linton with respect to the Taxpayer’s practice, Rose Bay and the ANHM Trust.

The Taxpayer accepted that it had been properly grouped by the Chief Commissioner. However the Taxpayer submitted that the Chief Commissioner should de-group the Taxpayer pursuant to the discretion under section 79 of the PTA, which empowers the Chief Commissioner to “determine that a person who would, but for the determination, be a member of a group is not a member of the group”.

The Statutory Framework

Section 79(2) of the Act stipulates that the Chief Commissioner may only make a determination under s. 79(1) “if satisfied, having regard to the nature and degree of ownership and control of the business, the nature of the businesses and any other matters the Chief Commissioner considers relevant, that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group”.

Submissions

The Taxpayer submitted that the paramount consideration in determining whether to exercise the discretion is the way that the grouped businesses were carried on, rather than any common shareholdings or directorships. The Taxpayer relied on the following facts to support its de-grouping application:

the Taxpayer’s and Rose Bay’s businesses were distinguishable as Rose Bay was a general veterinary practice, whereas the Taxpayer was a specialist and 24 hour emergency veterinary hospital;

the Taxpayer and Rose Bay carried on different and independent businesses. It was claimed that the Taxpayer was largely managed by Dr Simon in February 2012, whereas Rose Bay was managed by Dr Smyth and Dr Linton;

only about 6% of the Taxpayer’s income came from Rose Bay’s patients referrals;

Rose Bay did not receive patient referrals from the Taxpayer;

the bookkeeping and accounting functions of the Taxpayer and Rose Bay were completely separate. They did not share staff or premises;

the Taxpayer and Rose Bay only shared an X-Ray machine, with costs being borne by them on an arm’s length basis determined on estimated usage; and

there were no loan agreements or any other financial arrangements between Rose Bay and the Taxpayer.

The Chief Commissioner submitted that:

the Taxpayer employed too narrow an approach to interpreting s. 79 of the Act, and that the correct approach was that the Chief Commissioner must have regard to, inter alia, the nature and degree of ownership and control of the businesses in the group. Therefore, control and ownership were relevant and mandatory considerations; and

although de facto control of the day-to-day running of the Taxpayer’s practice was left to Dr Simon, nevertheless Dr Linton and Dr Smyth retained the capacity to control and influence the conduct of the business due to their majority directorships and shareholdings.

Accordingly, the Chief Commissioner submitted that the degree of connection between the Taxpayer and Rose Bay was too significant to permit the Chief Commissioner to exercise his discretion under section 79 of the PTA in favour of the Taxpayer and particularly in light of the following:

from the time the Taxpayer was registered and until 14 January 2014, the Taxpayer and Rose Bay shared the same premises as their registered offices and principal places of business according to information provided by them to ASIC. On registration, the Taxpayer informed ASIC that it in fact occupied the premises occupied by Rose Bay;

Dr Smyth has been a guarantor of the obligations of both the Taxpayer and Rose Bay under respective leases of their premises since 2011;

Dr Smyth and Dr Linton were both recorded on the payroll records of the Taxpayer and Rose Bay and at various times there were up to six people recorded on the payroll of both the Taxpayer and Rose Bay;

the Taxpayer and Rose Bay were joint lessees of the X-ray and blood equipment they shared and split the cost of the equipment between them;

the website for Rose Bay has a link to the website for the Taxpayer on its ‘Emergency’ page and in 2014, the websites of the Taxpayer and Rose Bay advertised that both Dr Linton and Dr Smyth practiced at both veterinary hospitals;

in May 2014, the Rose Bay address and telephone number was recorded as the postal and business address and telephone number of the Taxpayer in income tax and BAS records. Additionally, the Taxpayer and Rose Bay used the same tax agents for their income tax purposes in 2014;

the Taxpayer charged fees to Rose Bay in 2014 and the Taxpayer and Rose Bay have common suppliers of medication;

Dr Smyth and Dr Linton were both cheque signatories for the accounts of the Taxpayer and Rose Bay; and

notice was given to ASIC that Dr Smyth ceased to be director of the Taxpayer only two days after the Taxpayer lodged its application for exclusion from grouping.

Decision

Senior Member Verick preferred the Chief Commissioner’s interpretation of the s. 79 discretion and held that the onus was on the Taxpayer to establish the independence of their business and the absence of any connection between their practice and the other grouped entities during the Relevant Period.

Senior Member Verick found that:

the Taxpayer had not sufficiently discharged its onus of proof;

the factors identified by the Chief Commissioner, when considered cumulatively and objectively, lead to the conclusion that the Taxpayer’s business, during the relevant period, was closely associated with and complementary to the business carried on by Rose Bay next door to it. It was not a business that was independent of the Rose Bay business and the businesses were not completely different; and

Dr Simon’s unsworn statement could not be afforded any weight as it could not be tested because Dr Simon did not give evidence at the hearing as to his degree of control of the Taxpayer practice during the Relevant Period independent of the influence of Dr Linton and Dr Smyth.

Senior Member Verick stated that “it is sufficient if a member of the group has the ability to dictate the way the other member is managed. It is not necessary that there is evidence to establish that that power was, in fact, exercised”. Accordingly, Senior Member Verick found that the practice of the Taxpayer was closely associated with and complimentary to the business carried on by Rose Bay during the Relevant Period and affirmed the decision of the Chief Commissioner not to de-group the Taxpayer under section 79 of the PTA.